Here's a riddle for you. Say you could own one of two companies:
- Company A, which earns $2 million with $8 million in net tangible assets, and costs $25 million to purchase.
- Company B, which earns $2 million with $18 million in net tangible assets, and costs $18 million to purchase.
Furthermore, let's assume both companies will have flat unit volume for the foreseeable future. Which one would you pick?
A value investor's dream
Hmm ... let's think about this. If you pick Company B, you get more tangible assets, the same amount of earnings, and you're buying at a multiple of earnings of 9, versus 12.5 for Company A. Not only that, but wasn't Ben Graham, the godfather of value investing, a proponent of buying stocks at a discount to asset values?